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Series 7 > 6: MUNICIPAL BONDS (345) > Flashcards

6: MUNICIPAL BONDS (345) Flashcards

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Series 7 Top-off Exam flashcards
1
Q

T/F: someone who buys a muni bond at a premium must amortize the premium on a straight line basis over the remaining life of the bond

A

True

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2
Q

Formula to find yearly amortization on a bond sold at a premium

A

Premium amount / # of years until maturity

Example: If buy bond at 104, matures in 10 years
$400 / 10 years = $40/year

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3
Q

Settlement for gov securities

A

T+1

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4
Q

Define: Accrued Interest

A

Interest that has accrued but has not yet been paid since the last interest payment made on the bond

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5
Q

T/F: Municipal bonds that are backed by the income from specific projects are known as income bonds

A

False, known as revenue bonds

Income bonds are when you only get interest if issuer has enough earnings

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6
Q

What are COPs

A

Muni certificate of participation
form of lease revenue bond (not voter approval) allow holder to participate in land equiptment, etc. from the muni. Holders can forclose on asset

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7
Q

Original name for Coverdell ESA

A

“Education IRA”

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8
Q

What is an amortized bond

A

Each payment goes towards both interest and principal
More $ goes toward interest at beginning
Example: 30 yr mortgae is an amortized loan

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9
Q

If you bought a bond at 105 and it matures in 10 years, what is the yearly amortization?

A

$0.50

$5 / 10 years = $0.50 / year

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10
Q

The term “municipal fund security” refers to _____

A

A section 529 savings plan

Savings for college

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11
Q

Do revenue bonds have trust indentures? (legally binding contracts between issuer and trustees that represent bond holders interests)

A

Yes

revenue bond have trust indentures but GO bonds do not

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12
Q

Do GO bonds have trust indentures?

Legally binding contract between issuer and the trustees representing bond holders interests

A

No

But revenue bonds do

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13
Q

Settlement for muni bonds

A

T+2

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14
Q

Ppl subject to the alternative minimum tax will lose tax benefits normally associated with _____

A

Tax preference items

Such as tax exempt interest on muni bonds

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15
Q

Bond resolution (aka bond ordinances)

A

Details/authorizes issuance of bonds

States info on principal/interest

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16
Q

Qualified opinion

A

Bond counsel says the Muni issue is legal, but some contingencies exist

Might say this if authority to tax is in question or other situations

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17
Q

Does amortization increase/decrease cost basis?

A

Amortization decreases cost basis

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18
Q

Doubl barreled bond

A

Backed by a source of revenue and taxing ability of the issuer

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19
Q

When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a _____

A

double barreled bond

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20
Q

Why are GO bonds rederred to as “full faith and credit” bonds

A

Because they’re backed by the taxing ability of the issuer

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21
Q

5 kinds of revenue bonds

A

1) Industrial devolment
2) Special tax
3) special assesment
4) new housing authority
5) moral obligation bonds

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22
Q

How often does a bond trade flat

A

Twice a year

when the bond settles on an interest payment date

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23
Q

T/F: Although issued by a municiapl gov, Build America Bonds (BAB) are a taxable bond

A

True
BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.

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24
Q

Does amortization increase/decrease reported interest income?

A

decreases reported income

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25
Q

coupon bond

A

Only get coupon payments if issuing company has enough earnings

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26
Q

Are public authority bonds (PHAs) backed by the full fairth and credit of US gov?

A

Yes
PHA bonds are backed by the full faith of the U.S. government, which guarantees rent payments on these low-income properties.

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27
Q

Most corporate bond issues over ____ are required to include a trust indenture and file with SEC

A

$5 mil

28
Q

Does trust indenture say what happens if issuer defaults on the bonds?

A

Yes

This is included

29
Q

Trust indentures are present with revenue bonds but not _____ bonds

A

GO bonds
They have no trust indenture
(Legally binding contract between issuer and trustees that represent bond holders interests, SEC must approve, contains things like call provisions)

30
Q

Does trust indenture include terms of call ability for the bonds?

A

Yes

Doc has to be filed with SEC

31
Q

In general, what provides the backing for GO bonds?

A

The taxing ability of the issuer

32
Q

T/F: Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level.

A

True

33
Q

Unqualified opinion

A

Bond counsel found no problems with the Muni’s issue

34
Q

Straight line amortization

A

An equal amount of the premium is amortized each year the bond is held

35
Q

T/F: a bond in default would trade flat

A

True

it doesn’t have any interest payments

36
Q

[bonds] Dated date of a new issue

A

Date from which interest begins to accrue

Isn’t always the same as the semiannual interest payment dates

37
Q

What is the prospectus/preliminary prospectus used for bonds known as?

A

Official statement

Preliminary official statement

38
Q

If the bond counsel thinks a muni’s authority to tax is in question but that the rest of the issue is legal, it might render a ______ opinion

A

Qualified opinion

39
Q

Someone buys muni bonds on April 22, 2020. When would the trade settle?

A

April 24

40
Q

Moody’s MIG rating stands for ____

A

Municipal Investment Grade

Used for things like TANs (tax anticipation note)

41
Q

Who pays accrued interest, the buyer or the seller of the bond?

A

The buyer pays

42
Q

What is the only possible source of funds for an IRA

A

Earned income

43
Q

Can IRAs be funded through gifts?

A

No

Only earned income

44
Q

Bond counsel

A

Attorney for the issuer of munis
Gives opinion on tax status of bond
Unqualified opinion means found no issues
Qualified opinion means issue is legal but contingencies exist. (Example, if muni’s authority to tax is in question might render qualified opinion)

45
Q

Are variable rate bonds subject to interest rate risk?

A

No

Their coupon is adjusted periodically

46
Q

Settlement for options

A

T+1

47
Q

Why are New Housing Authority (NHA) bonds considered relatively safe?

A

Subsidy of a US gov agency secures the bonds

48
Q

Do COPs require voter approval?

A

No

They are revenue issues so no approval needed

49
Q

What is accretion on a discount bond?

A

Slowly increase the value of discounted bond untill it reaches par value at maturity

50
Q

Do revenue issues require voter approval?

A

No

51
Q

Days/months for accrued interest on Muni bonds

A

30 day months

360 day years

52
Q

What does it mean for a bond to be trading flat?

A

The bond is trading w/o accrued interest

happens when the bond settles on an interest payment date

53
Q

T/F: When a bond trades flat, the buyer does not owe accrued interest to the seller

A

True

54
Q

Dollar bonds

A

Actively traded bonds
Quoted as a percentage of par
Term comes from bond being quoted in dollars. Remember percentage of par equals a dollar price

55
Q

Does the Trust indenture delineate how much additional debt an issuer can assume?

A

Ya

56
Q

Can the beneficiary of a 529 plan also be the beneficiary of a Coverdell ESA?

A

Yes

57
Q

T/F: a general obligation bond (GO) isconsidered a revenue bond

A

False
A general obligation bond (GO) is not a revenue bond because it is backed by something other than a revenue-producing project.

58
Q

T/F: Coverdell ESA (education savings) can only accept $2,000 per child, per year.

A

True

> So if wanted to contribute more than $2k/year, might want a 529 plan

59
Q

According to Municipal Securities Rulemaking Board (MSRB) rules, a municipal finance professional (MFP) is

an associated person of a broker-dealer engaged in municipal securities representative activities other than retail sales.
a registered representative engaged in the retail sale of municipal securities to individual investors.
subject to the political contribution rules as outlined in MSRB Rule G-37.
not subject to the political contribution rules as outlined in MSRB Rule G-37.
A)
II and IV
B)
I and IV
C)
II and III
D)
I and III

A

D) 1 and 3

Explanation
As defined by the MSRB, an MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker-dealer, or who is in the supervisory chain above MFPs as described. MFPs are subject to the political contribution reporting rules as outlined in MSRB Rule G-37. Though there are exceptions for de minimis contributions, exceeding the allowable contribution limits may trigger restrictions on engaging in municipal securities business by the broker-dealer for two years.

LO 6.h

60
Q

Which of the following statements regarding the flow of funds found within a municipal trust indenture are true?

It describes the disbursement of funds for revenue bond issues.
It describes the disbursement of funds for general obligation issues.
It is found within the official statement.
It is found within the bond contract.
A)
I and IV
B)
I and III
C)
II and III
D)
II and IV
A

A) 1 and 4

> info found in trust indenture
(trust indenture is part of bond contract)

Explanation
The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.

LO 6.c

61
Q

A bank doing which of the following would not be required to register as a municipal broker-dealer with FINRA?

A)
Holding municipal securities as custodian for public customers
B)
Providing investment research regarding municipal securities to public investors
C)
Underwriting municipal securities for municipal issuers
D)
Engaging in transactions to purchase or sell municipal securities for public customers

A

A) holding muni securities as custodian for public customers

Explanation
A bank simply holding municipal securities as custodian for public customers need not register as a municipal securities broker-dealer with FINRA.

62
Q

T/F: Premiums are amortized; discounts are accreted

A

True

“Premiums are amortized; discounts are accreted”

63
Q

T/F: For municipal bonds bought at a premium, the bondholder must adjust cost basis annually in such an amount that, if held to maturity, there is no reported capital gain or loss.

A

True

> The amortization is straight line, or the same amount must be amortized each year.

64
Q

T/F: Bonds trading without accrued interest are trading flat.

A

True

Every bond trades flat twice a year

65
Q

T/F: Every bond trades flat twice a year

A

True

Bonds trading without accrued interest are trading flat

Series 7 (64 decks)

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